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Decrypting the role of distributed ledger technology in payments processes

This article gives a high-level explanation of how Distributed Ledger Technology (DLTs) can change payment processes.

Amber Wadsworth

The financial sector has grown ever more interested in crypto-currencies and the innovative Distributed Ledger Technology (DLT) that underpins them. For central banks, in their role as providers of currency and critical payments infrastructure, a key area of interest is whether DLTs could be used to enhance existing payment processes. This article gives a high-level explanation of how different DLTs can change payments processes. The answer depends on what form the distributed ledger takes. We identify four binary elements that determine the different properties of distributed ledgers and use case studies to evaluate how these elements can improve on, or fall short of, existing payments infrastructure. We find that Blockchain – the most well-known DLT that underpins Bitcoin – brings benefits in terms of the speed of cross-border settlement and improves security by removing the single point of failure, but has drawbacks in terms of slowing the speed and increasing the cost of smaller domestic transactions, and being energy intensive. Some central banks have experimented with other forms of DLTs that try to capture some of the benefits of Blockchain while minimising the costs, but so far these DLTs have tended to mimic existing payment processes and have not demonstrated many additional benefits.